Euromoney Country Risk September 2011 Results: Emerging sovereigns converge with the US, UK and France


Andrew Mortimer
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In the latest results of Euromoney’s country risk survey, Taiwan and Chile are rated alongside developed markets France, the US and UK. Qatar shrugs off regional uncertainty, while country risk scores across the eurozone hit new lows. African sovereigns have also done well. Andrew Mortimer reports.

A breakaway group of emerging market sovereigns has converged with higher rated developed markets in Euromoney’s country risk survey. The change, which is only now beginning to be reflected by the credit rating agencies, has been illustrated in stark fashion in ECR’s ratings over the past 12 months. The top three emerging sovereigns, Taiwan, Chile and Qatar, are ranked 17th, 19th and 20th respectively in the ECR survey. Each boasts favourable macroeconomic fundamentals, a stable political risk outlook and a strong policy track record. Both Taiwan and Chile now have an ECR score within two points of the US, UK and France, while Qatar’s score is only three points below triple-A rated UK. The ECR survey evaluates the investment risk of a country by asking experts to rate countries across a range of political, economic and structural risk criteria. Over 250 economists participate in the survey, which assigns a country risk score to 186 countries around the world. The creditworthiness of Taiwan, Chile and Qatar is reflected in the low borrowing costs paid by these sovereigns. On September 8, Chile, up eight places, secured the lowest ever yield for a Latin American sovereign on its newly issued 10-year bond. Their status is also reflected in the CDS market, where the cost of insuring Chilean and Qatari debt is now within 55 basis points of so-called ‘risk free’ US sovereign debt. Yet the disparity between their credit ratings and those of troubled developed countries is large. European sovereigns UK (18th) and France (16th) retain their triple-A ratings for the moment, three notches above double-A rated Taiwan (down one place), whose dynamic economic performance in recent quarters has seen it prosper in the ECR table. Single-A rated Chile, which climbs six places in the September survey results, is rated three notches below the US, despite scoring only a point lower than it across a range of political, economic and structural criteria. 

EM Convergence: ECR Results, September 2011
CountryECR Rank Rank Change (vs June '11)ECR Score
United States15 0 80.2
France16 1 80.1
Taiwan17 -1 79.9
United Kingdom18 0 79.0
Chile19 6 78.9
Qatar20 8 75.9

Not one of the US, the UK or France can demonstrate anything like the growth outlook of these emerging sovereigns, particularly Qatar (up seven places in the ECR table), which the IMF expects to grow by 20% this year. Nor can the political risk outlook for the three developed sovereigns be priced at zero when bond-market vigilantes are circling and the prospect of default was only narrowly avoided in the US in August. Against this, analysts are questioning the sustainability of triple-A ratings for some developed economies and the usefulness of the rating agencies themselves. Jerome Booth, head of research at Ashmore Investment Management, says: “Many people have been outraged by S&P’s decision to downgrade the US, but I know of no comparable occasion where a substantial proportion of the legislature has called for default. That’s a significant part of the risk in this case. It’s about how radically government policy may shift in the future.” Panicos Demetriades, professor of economics at the University of Leicester, concurs: “It’s as if the US and Europe have to behave worse than everyone else before they merit a downgrade.” Eurozone accelerates down Europe’s sovereign debacle continues. Euro-area member states fell by an average of 1.8 points in the latest ECR survey, the steepest fall since the crisis began. The result indicates the severe pressure exerted on European borrowers in the absence of a lasting solution to the crisis. In all, country risk scores for 13 of the 17 member states fell during the quarter, including those for countries such Germany (down two places) and Slovakia, whose score fell but rank stayed the same. Among the peripheral economies, Greece plunged 35 places to 100th overall, while Portugal fell 16 and Ireland was down eight, despite IMF programmes in both. “There is a sense of policy confusion or even anaesthesia among the eurozone leadership,” says Stuart Culverhouse, chief economist at Exotix. “Each time an issue arises, a piecemeal solution is proposed that buys them two weeks before the situation reverts to its previous state.” Overall, the eurozone deteriorated in all of the survey’s 15 categories, registering its largest fall in the economic assessment section. Even Luxembourg, traditionally a safe haven for investors, failed to escape the contagion, falling to third place from second after registering a lower score for bank stability for the second consecutive quarter. Cyprus fell by 11 places in the rankings. The sovereign, which has received multiple downgrades from the rating agencies since March, has seen its borrowing costs rise to distressed levels as markets reacted negatively to a sharply rising budget deficit and the banking sector’s exposure to Greek corporate and government debt. The failure of the island’s communist-led coalition to pass a long awaited budget reform bill has only increased speculation that Cyprus will need financial assistance from the EU. Italy falls four places to 35th in the rankings as its debt crisis continues. The downward shift means that economists now consider Italy to be riskier than Oman, the UAE and Poland. Despite the huge domestic market for its debt, Italy has repeatedly seen yields on its 10-year bonds rise above 6% since the beginning of August. Following a public spat between Silvio Berlusconi and finance minister Giulio Tremonti, Italy’s government accelerated its deficit reduction programme, but bond yields have remained elevated, while shares in Italian banks have suffered heavily during the summer. Africa’s borrowers on the rise African sovereigns have been the big winners in the ECR tables in the third quarter. Sub-Saharan African country risk scores improved by an average of two points between June and September. The continent continues to be buoyed by high prices for commodities and strong domestic demand from Africa’s urbanising populations. Zambia (up 15 places), Angola (up three) and Cameroon (up five) all saw substantial re-ratings by economists. The favourable assessments of African country risk were supported by the rise in the access to capital markets component of the survey, indicating that many banks are prepared to look favourably at the continent. In a year that has seen the largest ever capital raising for an African private equity vehicle, scores in this category of the survey have risen by an average of 20% since June, with Tanzania (46%), Ghana (45%), Malawi (45%) and Nigeria (44%) the four big winners. 

 Source: ECR

Rwanda (up one place) is a prime example. The country’s ECR score has risen by 18 points in the past six months as the single-B rated sovereign received recognition for its strong economic fundamentals. GDP per capita has almost doubled in the past five years, while economic growth is forecast to remain at around 7% till 2013. Furthermore, Rwanda’s stable political backdrop since the 2010 presidential elections has led to speculation that it may issue a debut Eurobond, which would help the country to reduce its reliance on international aid. Arnaud Louis, an analyst at Fitch, says: “Structural improvements, such as increased economic diversification and lower reliance on international aid, need to be seen before further positive rating action is possible.” If Rwandan policymakers need an example, they could look to Senegal: the country has risen by 14 places since it became the latest African sovereign to issue a Eurobond.
Source: ECR 

Côte d’Ivoire has shown signs of political normalisation since president Alassane Ouattara was sworn in on May 21. The nation has risen 11 places from its low of 152nd in March. The ceasefire that followed the overthrow of Laurent Gbagbo in April has resulted in a resumption of cocoa exports and enabled tentative reconstruction to begin, although the government has since announced that it will not make further coupon payments on its defaulted Eurobond for the rest of 2011. Culverhouse at Exotix says: “The new leadership have shown a willingness to communicate with creditors, which the market wants to see. The government will likely emerge from default at some point next year through an exchange. There is a lot of good faith out there, but ultimately creditors will want to get paid.” Several countries underperformed Africa’s upward trend: Swaziland (down two places), Burkina Faso (down four) and Sierra Leone (down 19) were among 12 African sovereigns that saw declining ECR scores during the quarter. Asia, CEE & Latin America: Continued improvement In Latin America, sovereigns have registered an average one-point improvement over the quarter, reflecting the favourable terms at which many are now able to borrow on international capital markets (See ECR: Chile leads Latin American renaissance, August 2011). Brazil shook off fears of a consumer-credit bubble to rise six places, while pace-setting Chile is now ranked the 19th safest investment destination in the world. Colombia (up five), Mexico (up six) and Peru (up eight) also registered big gains. Despite the problems of the eurozone, emerging Europe continued to improve in the eyes of economists. The average country score for Central and Eastern Europe increased by 0.5 points during the quarter as analysts took into account the low debt levels of many CEE sovereigns. Euro membership continues to be viewed as beneficial for Estonia, which has climbed six places since June. Fast-growing Turkey gained nine places over the same period, despite its vulnerability to an economic slowdown in the eurozone. Russia’s strong scores for economic outlook and government finances are held back by its poor scores in the political risk section of the survey. In the Asia-Pacific region, the risk outlook for Vietnam continued to decline in the third quarter; the country fell 10 places after inflation surged to 23% in August, the highest rate for three years. Australia shook off concerns about the dependency of its banking sector on short-term funding and a less favourable outlook for commodities prices during the third quarter to climb by one place to 11th, while China falls by one place as leading indicators continued to point to a slowdown in economic growth. India falls by three places after posting deteriorating scores in the economic risk component of the survey.

Methodology Euromoney Country Risk (ECR) evaluates the investment risk of a country across 15 criteria, such as risk of default on a bond, risk of losing direct investment and risk to global business relations, by polling noted international economists. This qualitative score is averaged and combined with three basic quantitative values to give a score on a 100-point scale, where 100 is safest and 0 most risky. Over 250 economists participate in the survey, assigning a score to 186 countries globally. To find out more, visit